[Federal Register Volume 62, Number 225 (Friday, November 21, 1997)]
[Notices]
[Pages 62366-62369]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-30573]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22888; File No. 812-10740]
The Guardian Insurance & Annuity Company, Inc., et al.; Notice of
Application
November 14, 1997.
AGENCY: The Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an order under section 6(c) of the
Investment Company Act of 1940 (the ``Act'') granting relief from rule
6e-2(c)(1) and from certain provisions of the Act and rules thereunder
specified in paragraph (b) of rule 6e-2; and from sections 2(a)(32) and
27(i)(2)(A) of the Act and rules 6e-2(b)(12) and 22c-1 thereunder.
-----------------------------------------------------------------------
SUMMARY OF APPLICATION: Applicants seek exemptive relief to the extent
necessary: (1) to permit them to offer and sell certain variable whole
life insurance policies with modified scheduled premiums
(``Policies''); and (2) to permit certain other persons which may
become the principal underwriter for such Policies (``Future
Underwriters'') to offer and sell such Policies.
APPLICANTS: The Guardian Insurance & Annuity Company, Inc. (``GIAC''),
The Guardian Separate Account K (``Separate Account''), and Guardian
Investor Services Corporation (``GISC'').
FILING DATES: The application was filed on July 28, 1997, and amended
and restated on October 20, 1997.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Secretary of the
Commission and serving Applicants with a copy of the request,
personally or by mail. Hearing requests should be received by the
Commission by 5:30 p.m. on December 9, 1997, and should be accompanied
by proof of service on Applicants in the form of an affidavit or, for
lawyers, a certificate of service. Hearing requests should state the
nature of the writer's interest, the reason for the request, and the
issues contested. Persons may request notification of a hearing by
writing to the Secretary of the Commission.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW., Washington, DC 20549. Applicants, c/o Richard T. Potter,
Jr., Esq., The Guardian Insurance & Annuity Company, Inc., 201 Park
Avenue, South, New York, New York 10003.
FOR FURTHER INFORMATION CONTACT: Ethan D. Corey, Senior Counsel, at
(202) 942-0675, or Kevin M. Kirchoff, Branch Chief, at (202) 942-0672,
Office of Insurance Products, Division of Investment Management.
SUPPLEMENTARY INFORMATION: Following is a summary of the application;
the complete application may be obtained for a fee from the Public
Reference Branch of the Commission, 450 5th Street, NW., Washington, DC
20549 (tel. (202) 942-8090).
Applicants' Representations
1. GIAC, a Delaware stock life insurance company, is a wholly-owned
subsidiary of The Guardian Life Insurance Company of America.
2. GIAC established the Separate Account under Delaware insurance
law to serve as a funding vehicle for certain variable life insurance
products. The Separate Account is registered under the Act as a unit
investment trust. The Separate Account currently has eight investment
divisions, each of which invests in shares of a corresponding mutual
fund registered under the Act as an open-end diversified management
investment company.
3. GISC, a wholly-owned subsidiary of GIAC, will act as the
principal underwriter for the policies. GISC is registered with the
Commission as a broker-dealer under the Securities Exchange Act of 1934
and is a member of the National Association of Securities Dealers, Inc.
(the ``NASD'').
4. Those premium amounts set forth in each Policy which must be
paid to obtain the benefits provided by the Policy exclusive of the
additional benefit riders (``Basic Scheduled Premiums'') plus rating
charges for those insureds that do not satisfy (GIAC's underwriting
requirements for standard issuance, and premiums for insurance benefits
that the Policy owner may add as riders to the Policy (collectively,
``Policy Premium Assessments'') are payable until the Policy
anniversary nearest the insured's 100th birthday. If all Basic
Scheduled Premiums and Policy Premium Assessments (collectively,
``Policy Premiums'') are paid when due or skipped under the premium
skip option (described below), the Policy will not lapse and will
retain its minimum death benefit guarantee until the Policy anniversary
nearest the insured's 100th birthday, so long as no partial withdrawals
are made and there is no Policy debt outstanding.
5. Policy Premiums may be paid annually or periodically. Each
periodic Policy Premium must be at least $100.
6. The Policy's Basic Scheduled Premiums cannot be increased during
the guaranteed premium period, but will be reduced by GIAC if the
Policy's face amount is decreased. The guaranteed premium period starts
on the Policy date and ends on the later of the Policy anniversary
nearest the insured's 70th birthday or the 10th Policy anniversary.
After the expiration of the guaranteed premium period, a
[[Page 62367]]
Policy's Basic Scheduled Premiums may increase.
7. A Policy owner also may make unscheduled premium payments,
subject to certain limits and restrictions set forth in the Policy and
GIAC's administrative procedures.
8. GIAC generally credits and allocates each payment as of the
business day of receipt, if it receives the payment before the close of
business at its executive office. There are two exceptions to this
practice. First, GIAC credits and allocates any payment received prior
to the issue date on the issue date. Second, GIAC credits and allocates
that portion of any payment that is used to pay a Policy Premium on the
premium due date if such payment is received on or during the 31 days
preceding such premium due date.
9. If Policy Premiums and/or unscheduled payments in excess of
$100,000 are received from the Policy owner prior to the later of: (i)
45 days after Part I of the completed application is signed; or (ii) 15
days after the issue date, GIAC will allocate that portion, if any, of
a scheduled premium payment or an unscheduled payment which is
allocated among the variable investment options and the fixed-rate
option according to instructions provided by the Policy owner (``net
premium'') in excess of $100,000 (``excess net premium'') to The
Guardian Cash Fund, a money market fund. On the later of (i) or (ii),
any excess net premium allocated to The Guardian Cash Fund and any
earnings attributable thereto, will be re-allocated in accordance with
the policy owner's then-current allocation instructions.
10. The Policy provides for a premium skip option, which permits an
owner to skip one or more scheduled premium payments after the first
Policy year, subject to certain conditions. When a premium skip is
effected, GIAC deducts from the sum of the values attributable to a
Policy which are allocated to the variable investment options, the
fixed-rate option, and the loan collateral account (the ``Policy
Account Value'') an amount equal to 92.5% of any Policy Premium
Assessments that would be due on the Policy Anniversary to pay such
assessments for the coming Policy year. The amount will be deducted
proportionately from the Policy Account Value attributable to the
variable investment options. If some or all of the required deduction
exceeds the Policy Account Value held in the variable investment
options, GIAC will deduct the remainder from the Policy Account Value
held in the fixed-rate option.
11. In addition, a Policy owner may use up to 90% of the Policy's
cash surrender value less any then-outstanding Policy debt (``loan
value'') to pay a Policy Premium if the Policy owner has elected and is
eligible for the Policy's automatic premium loan feature. Under the
automatic premium loan feature, GIAC transfers the required premium
amount from the unloaned Policy Account Value to the loan collateral
account and uses the loan proceeds to pay the Policy Premium due.
12. A Policy Premium which is unpaid as of its due date is in
default, but the Policy provides a 31-day grace period for the payment
of each Policy Premium after the first. If the insured should die
during the grace period and before the premium is paid, the death
proceeds payable to the beneficiary will be reduced by an outstanding
Policy debt and any due and unpaid Policy Premium for the period
through the Policy month of death. If GIAC does not receive a Policy
Premium before the grace period ends, and neither the premium skip
option nor the automatic premium loan feature are available, and no
waiver of premium rider is in effect, the Policy will lapse. Upon
Policy lapse, all insurance coverage ends as of the end of the grace
period, unless a policy value option becomes effective. The Policy
owner can surrender the Policy for its net cash surrender value at any
time during the grace period.
13. GIAC deducts Policy Premium Assessments and a premium charge
from Policy Premiums and unscheduled payments. Policy Premium
Assessments are deducted from each Policy Premium to cover GIAC's risks
and costs associated with providing insurance coverage to higher risk
insureds or providing additional benefits through Policy benefit
riders.
14. The premium charge initially is equal to 7.5% of each Basic
Scheduled Premium and each unscheduled payment and will decrease to
4.5% after the total amount of premiums paid under a Policy, through
Basic Scheduled Premiums and/or unscheduled payments, equals 12 annual
Basic Scheduled Premiums payable during the guaranteed premium period
for the current fact amount. This charge covers premium taxes, a
portion of GIAC's federal income tax burden, and a premium sales
charge. GIAC also reserves the right to charge a maximum handling fee
of $2.00 for each unscheduled payment it receives.
15. GIAC deducts each month from the Policy Account Value a Policy
charge, an administration charge, a guaranteed insurance amount charge,
and a charge for the cost of insurance. These charges compensate GIAC
for the cost of underwriting and issuing a Policy. GIAC also may make
transaction deductions upon: (i) a partial withdrawal (the lesser of
$25 or 2% of the requested withdrawal amount); (ii) a premium skip; and
(iii) a transfer after the twelfth transfer in a Policy year ($25).
GIAC also charges the Separate Account for the mortality and expense
risks it assumes, at an annual rate of 0.60% (guaranteed not to exceed
0.90%) of the Separate Account's average daily net assets. Charges for
investment advisory and other Fund expenses are indirectly borne by
owners of the Policies.
16. During the first 12 Policy years, GIAC deducts a surrender
charge upon surrender, lapse, a lapse option taking effect upon Policy
default, and upon a reduction in face amount by request or through a
partial withdrawal. The surrender charge during the first Policy year
is expressed as a flat dollar amount charge per $1000 in face amount;
the per $1000 rate will vary from $5.37 to $58.87 based upon the issue
age, sex, and underwriting class of the insured. The surrender charge
will decrease proportionally on an annual basis over the first 12
Policy years so that the surrender charge beginning in year 13 is $0.
After imposition of the surrender charge, a Policy's net cash surrender
value may be zero, particularly in early Policy years.
17. In the case of a reduction in face amount, the surrender charge
is prorated by multiplying the applicable surrender charge by the
following fraction to reduce the payable charges:
the amount of the face amount reduction
-----------------------------------------------------------------------
the face amount prior to the reduction
The adjusted surrender charge is paid by deductions from the
unloaned Policy Account Value. The surrender charge is intended to
compensate GIAC for certain sales-related and administrative expenses.
18. The Policy provides for two alternate death benefit options.
The Option 1 death benefit is equal to the greatest of: (i) the face
amount of the Policy on the date of the insured's death; (ii) the
minimum death benefit then required under federal tax laws on the
monthly date preceding the insured's death; or (iii) after the first
Policy year, the Policy's ``variable insurance amount.'' The variable
insurance amount provides a guarantee that the death benefit will be
greater than the then-effective face amount if the Policy Account Value
is greater than
[[Page 62368]]
the net single premium set forth in that Policy on any Policy review
date.
19. The Option 2 death benefit is equal to the greatest of: (i) the
face amount of the Policy on the date of the insured's death plus any
amount by which the Policy Account Value then exceeds the Benchmark
Value \1\ as adjusted to the monthly date preceding the date of death;
(ii) the minimum death benefit then required under federal tax laws on
the monthly date preceding the insured's death; or (iii) after the
first Policy year, the Policy's variable insurance amount.
---------------------------------------------------------------------------
\1\ The Benchmark Value is a hypothetical value to which GIAC
compares the actual Policy Account Value to determine whether and to
what extent certain Policy privileges can be exercised (such as the
premium skip option), and to redetermine the Basic Scheduled Premium
in Policy years after the guaranteed premium period.
---------------------------------------------------------------------------
20. Under an Option 1 Policy, when favorable investment performance
and unscheduled payments increase the Policy Account Value, the Net
Amount at Risk (the amount of death benefit provided under the death
benefit option then in force minus the Policy Account Value) under the
Policy will decrease. When the Net Amount at Risk is reduced, the
dollar amount of the cost of insurance charge deducted on each monthly
date may also decline.
21. Under an Option 2 Policy, favorable investment performance and
the addition of unscheduled payments can possibly increase the Policy
Account Value sufficiently to increase the death benefit. At such time,
however, the Net Amount at Risk will not change as a result of the
favorable investment performance or unscheduled payments. Unfavorable
investment performance can reduce an Option 2 Policy's death benefit,
but the benefit will never be less than the face amount.
22. Under either Option, any partial withdrawal taken after a
monthly date will reduce the death benefit by the amount of the partial
withdrawal and any applicable charge if the insured dies after that
monthly date but prior to the next succeeding monthly date.
Applicants' Legal Analysis
Definition of ``Variable Life Insurance Contract''
1. Rule 6c-3 grants exemptions from those provisions of the Act
that are specified in paragraph (b) of Rule 6e-2 (except for Sections 7
and 8(a)) to certain separate accounts of life insurance companies that
support variable life insurance policies. Specifically, the exemptions
provided by Rule 6c-3 are available only to separate accounts
registered under the Act whose assets are derived solely from the sale
of ``variable life insurance contracts'' that meet the definition set
forth in Rule 6e-2(c)(1), and from certain advances made by the
insurer. The term ``variable life insurance contract'' is defined by
Rule 6e-2(c)(1) to include only life insurance policies that provide a
death benefit and a cash surrender value, both of which vary to reflect
the investment experience of the separate account, and that guarantee
that the death benefit will not be less than an initial dollar amount
stated in the policy.
2. Applicants believe that the Option 2 death benefit falls within
the requirement that it ``vary to reflect the investment experience of
the separate account.'' Although the Option 2 death benefit varies only
when the Policy's cash value exceeds its Benchmark Value, Applicants
state that it is analogous to more conventional scheduled premium
variable life insurance policies where death benefits are increased
when investment experience exceeds an assumed investment rate. Rule 6e-
2(c)(1) clearly contemplates that a death benefit would vary only if it
exceeds a guaranteed minimum death benefit. A Policy under the Option 1
death benefit, however, will fail to satisfy this requirement if the
death benefit has not been otherwise increased to satisfy Federal tax
law requirements.
3. The Policy also contains other provisions, relating primarily to
the flexibility of premium payments, that are not specifically
addressed in Rule 6e-2. Applicants must rely on certain exemptive
provisions in Rule 6e-2(b), as described below, in order to issue,
sell, and maintain the Policies.\2\ Applicants therefore request relief
from the definition of ``variable life insurance contract'' set forth
in Rule 6e-2(c)(1) to the extent necessary to permit reliance on the
exemptions provided in each of the provisions of paragraph (b) of Rule
6e-2 that are set forth below, under the same terms and conditions
applicable to a separate account that satisfies the conditions set
forth in Rule 6e-2.
---------------------------------------------------------------------------
\2\ Certain of the relief requested may not currently be
necessary in light of the structure of the Separate Account as a
``unit investment trust,'' but would become necessary if the
Separate Account were to be restructured as an open-end management
company in the future. The Policies permit such a restructuring.
---------------------------------------------------------------------------
(a) Paragraph (b)(1)--``Sales load'' is no longer subject to the
specific quantitative limits set forth in the Act and rules thereunder.
It is nonetheless possible that the amount of ``sales load'' imposed
under the Policies would need to be determined (for example, in
connection with analyzing an exchange offer involving the Policies; or
analyzing variations in sales load pursuant to Section 22(d) of the
Act). Accordingly, Applicants seek relief permitting them to rely on
paragraph (b)(1) of Rule
6e-2.
(b) Paragraph (b)(3)--Relief is requested to permit the Separate
Account to rely on paragraph (b)(3)(ii) of Rule 6e-2 in order to effect
compliance with Section 8(b) of the Act (regarding the filing of a
registration statement with the Commission).
(c) Paragraph (b)(4)--Relief is requested to permit Applicants to
apply the eligibility restrictions of Section 9 of the Act in the
fashion contemplated by paragraph (b)(4).
(d) Paragraph (b)(5)--Relief is requested to permit Applicants to
rely on the exemptions provided from Section 13(a) of the Act relating
to insurance regulatory authority imposing certain requirements on the
investment policies of the Separate Account; and disapproval by GIAC of
changes in the investment policy of the Separate Account initiated by
Policy owners under circumstances contemplated by and in accordance
with the requirements of paragraph (b)(5); and to rely on the relief
provided by paragraph (b)(15) of Rule 6e-2 (see below), which in turn
refers to the conditions of paragraph (b)(5).
(e) Paragraph (b)(6)--Relief is requested to permit Applicants to
rely on the relief provided by paragraph (b)(15) of Rule 6e-2 (see
below), which in turn refers to the conditions of paragraph (b)(6).
(f) Paragraph (b)(7)--Relief is requested to permit Applicants to
rely on the exemptions provided from Section 15(a), (b), and (c)
relating to an insurance regulatory authority disapproving advisory or
underwriting contracts; disapproval by GIAC of changes in the principal
underwriter for the Separate Account initiated by Policy owners; and
disapproval by GIAC of changes in the investment adviser to the
Separate Account initiated by Policy owners under circumstances
contemplated by and in accordance with the requirements of paragraph
(b)(7); and to rely on the relief provided by paragraph (b)(15) of Rule
6e-2 (see below), which in turn refers to the conditions of paragraph
(b)(7).
(g) Paragraph (b)(8)--Relief is requested to permit Applicants to
rely on the exemptions provided from Section 16(a) relating to an
insurance regulatory authority disapproving or removing a member of the
board of directors of a separate account under circumstances
contemplated by and in accordance with the requirements of
[[Page 62369]]
paragraph (b)(8); and to rely on the relief provided by paragraph
(b)(15) of Rule 6e-2 (see below), which in turn refers to the
conditions of paragraph (b)(8).
(h) Paragraph (b)(9)--Relief is requested to permit Applicants to
rely on the exemptions provided from Section 17(f) in order to maintain
separate account assets in the custody of GIAC or an affiliate thereof,
in accordance with the requirements of paragraph (b)(9).
(i) Paragraph (b)(10)--Relief is requested to permit Applicants to
rely on the exemptions provided from Section 18(i) in order to provide
for variable contract owner voting as contemplated by and in accordance
with the requirements of paragraph (b)(10).
(j) Paragraph (b)(12)--Relief is requested to permit Applicants to
rely on the exemptions provided from Section 22(d), 22(e), and Rule
22c-1 in connection with issuance, transfer and redemption procedures
for the Policies, including premium processing, premium rate structure,
underwriting standards, and the benefit provided by the Policies, as
contemplated by and in accordance with the requirements of paragraph
(b)(12).
(k) Paragraph (b)(14)--Relief is requested to permit Applicants to
rely on the relief provided by paragraph (b)(15) of Rule 6e-2 (see
below), which in turn refers to the conditions of paragraph (b)(14).
(l) Paragraph (b)(15)--Relief is requested to permit Applicants to
rely on the exemptions provided from Section 9(a), and to facilitate
the voting by GIAC of shares of management investment companies held by
the Separate Account in disregard of Policy owner instructions under
the circumstances contemplated by, and in accordance with the
requirements of, paragraph (b)(15). Relief is also requested to permit
Applicants to rely on the exemptions provided from Section 14(a),
15(a), 16(a), and 32(a)(2) in connection with any registered management
investment company established by GIAC in the future in connection with
the Policies, in accordance with the requirements of paragraph (b)(15),
and paragraphs (b)(5), (b)(7), (b)(8), and (b)(14) of Rule 6e-2.
4. Applicants submit that the considerations that led the
Commission to adopt Rules 6c-3 and 6e-2 apply equally to the Separate
Account and the Policy, and that the exemptions provided by these rules
should be granted to the Separate Account and to the other Applicants
on the terms specified in those rules, except to the extent that
further exemption from those terms is specifically requested in the
application.
Redeemability
5. Section 27(i)(2)(A) provides that no registered separate account
funding variable insurance contracts or its sponsoring insurance
company shall sell such contract unless the contract is a ``redeemable
security.'' Section 2(a)(32) defines a ``redeemable security'' as one
entitling its holder to receive ``approximately his proportionate
share'' of the issuer's current net asset value upon presentation to
the issuer. Applicants request relief from the requirement in Section
27 that the Policies be ``redeemable securities,'' and from the
definition of ``redeemable security'' set forth in Section 2(a)(32), in
connection with the issuance and sale of the Policies.
6. Rule 22c-1 requires that a Policy be redeemed at a price based
on the current net asset value of the Policy next computed after
receipt of request for surrender. If the conditions of Rule 6e-2(b)(12)
are satisfied, paragraph (b)(12) provides certain exemptions from Rule
22c-1. A contingent deferred charge such as the surrender charge may,
however, not be contemplated by Rule 6e-2(b)(12), and thus may be
deemed inconsistent with the foregoing provisions, to the extent that
the charge can be viewed as causing a Policy to be redeemed at a price
based on less than the current net asset value that is next computed
after surrender or after partial withdrawal from the Policy.
Accordingly, Applicants request relief from Rule 22c-1 and Rule 6e-
2(b)(12), to the extent necessary to permit the deduction of the
surrender charge on surrender, lapse, a lapse option taking effect, or
face amount reduction by request or through partial withdrawal from a
Policy.
7. Although Section 2(a)(32) does not specifically contemplate the
imposition of a charge at the time of redemption, Applicants assert
that such charges are not necessarily inconsistent with the definition
of ``redeemable security.''
8. Applicants submit that although the deferred imposition of the
surrender charge (upon surrender, lapse, or reduction in face amount by
request or through partial withdrawal) may not fall within the literal
pattern of all the provisions described in the application, that does
not change the charge's essential nature. Moreover, the proposed
amendments to Rule 6e-2 would permit a sales charge to be imposed on a
contingent deferred basis. Contingent deferred charges are also
authorized by Rule 6e-3(T) for contracts able to rely on that rule.
Therefore, Applicants submit that the surrender charge is consistent
with the principles and policies underlying limitations in Sections
2(a)(32) and 27(i)(2)(A) of the Act and Rules 6e-2(b)(12) and (c)(1)
and 22c-1 thereunder.
Class Exemption for Future Underwriters
9. Applicants seek the relief requested herein with respect to
Future Underwriters. Future Underwriters will be members of the NASD.
10. Applicants represent that the terms of the relief requested
with respect to any Future Underwriters are consistent with the
standards set forth in Section 6(c) of the Act. Further, Applicants
state that, without the requested class relief, exemptive relief for
any Future Underwriter would have to be requested and obtained
separately. Applicants assert that these additional requests for
exemptive relief would present no issues under the Act not already
addressed herein. Applicants submit, for all the reasons stated herein,
that their request for class exemptions is necessary or appropriate in
the public interest and consistent with the protection of investors and
the purposes fairly intended by the Policy and provisions of the Act,
and that an order of the Commission including such class relief,
should, therefore, be granted.
Conclusion
For the reason summarized above, Applicants assert that the
requested exemptions are appropriate in the public interest and
consistent with the protection of investors and purposes fairly
intended by the policy and provisions of the Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-30573 Filed 11-20-97; 8:45 am]
BILLING CODE 8010-01-M